Andrew Wily - Personal Insolvency Australia

In Australia, insolvency is defined as ‘when a person is unable to pay his/her debts as and when they fall due for payment’.  Reasons why a person might suddenly find themselves coping with unmanageable debt, leading to insolvency can vary. They might include the loss of a job, family illness, or a collapse of family relationships, which are often beyond someone’s control.  This article reviews several options that could provide you with a way to take control of a unfavourable financial situation.

What are some possible options to deal with unmanageable debt?  

Option 1: Informal Arrangements

One option is to consider contacting your creditors to negotiate a payment arrangement. Some may agree to extend your payment period, decrease the amount of payments, or accept a smaller amount in settlement for your debts.

Before taking such option, however, it would be in your interest to consider enlisting the help of a registered Trustee or accountant. They may give you recommendations for your next action and may also offer to speak to your creditors on your behalf.

Option 2: Formal Arrangements

Under the Bankruptcy Act of 1966, a person has a number of formal options to assist them to deal with their unmanageable debt.  The Act allows the following formal options as follows:

a)   Declaration of intent to present a debtor’s petition,
b)   Proposal of a formal debt agreement,
c)   Proposal of a personal insolvency agreement (PIA), and
d)   Voluntary bankruptcy.

If you decide to undergo any of the abovementioned arrangements, your creditors are subject to the provisions of the law, which may or may not prohibit them from taking further action to recover your debts.

a)   Declaration of intention to present a debtor’s petition

A declaration of intention to present a debtor’s petition, gives you a period of seven (7) days to speak with your creditors or to consider what options are available to take control of your debts. During this period, creditors are stopped from garnisheeing your wages or recovering your assets to pay for unsecured debts. However, secured creditors still have the right to repossess an asset during this period. You may lodge a declaration of intention to present a debtor’s petition once every 12 months. You do not necessarily become bankrupt after this period expires.

b)   Formal Debt Agreement

A formal debt agreement is a legally binding contract between you and your creditors, where creditors agree to receive a certain amount of money from you to settle your debts. This amount may be smaller than the real value of the debts. 

Payment is based upon your capacity to pay, after having considered income and household expenses, among other things. You may propose any of the following:

a) Weekly or monthly instalment payments from one’s income,
b) A lump sum payment, which may be less than the real value of the debts and will be divided among creditors, and
c) A freeze on all your debts to allow you time to recover.

For more detailed information on Formal Debt Agreements.

c) Personal Insolvency Agreement

A personal insolvency agreement (PIA) is a legally binding agreement between you and your creditors, which allows you to settle your debts without becoming bankrupt. Please note that doing a PIA cannot exclude your statutory debts. 

The primary difference between a formal debt agreement and a PIA is that there are no limits on debts, incomes, and assets for persons who are considering undergoing a PIA. You must be insolvent and in Australia, or must have an Australian connection (i.e. must be involved in a business operating in Australia) to be eligible to propose a PIA.

For more detailed review of the workings of a Personal Insolvency Agreement.

d) Voluntary Bankruptcy

Voluntarily bankruptcy is an option if you are unable to come to a suitable agreement with your creditors. You have to be living in Australia or must have an Australian connection at the time of petitioning for you to be eligible. Furthermore, if ITSA believes that you are able to pay your debts and that you are filing for bankruptcy to avoid paying certain debts, your petition to become bankrupt will be refused.

ITSA, which is the Official Trustee, is initially appointed to become your Trustee. However, you may choose to appoint a registered Trustee to administer your bankruptcy or leave it to the ITSA to arrange for one to be appointed. The creditors may change your Trustee anytime they deem necessary, however they need to pass an ordinary resolution at a meeting of creditors.

The Trustee is responsible for informing your creditors of your bankruptcy. He will be in charge of administering your estate and taking actions to pay your debts. Such actions include:

• Selling your assets, save for certain necessary belongings;
• Requiring you to make regular contributions from your income if you are earning an amount that is more than a set limit;
• Recovering assets you may receive during the bankruptcy or which you have transferred to another person for an amount less than the real value of the asset; and
• Investigating your past and present financial affairs.

Bankruptcy generally lasts for three years, but this period can be extended up to five to eight years, if decided by the Trustee. It is shown as a permanent record on the National Personal Insolvency Index (NPII)  and on the records of credit reporting companies for up to seven years.

For further assistance on which option would best suit your situation or for general personal insolvency information, contact us directly via e-mail or through our Insolvency InfoLine 1800 802 702 for a FREE consultation.

The information in this article was correct at the date of posting and should be relied upon as a guide only.  We urge you to always seek professional advice before taking any further action.